Fees and investing

I just made some changes to my investment portfolio. Entering my mid-30s (my birthday is in August for anyone who feels obligated to shower me with lavish gifts), I thought it was time to get more serious about investing. There’s a few financial goals I had in mind, so I wanted to make sure my investments were targeted to reach them. 

One thing that I paid close attention to was the fee associated with each investment I made. 

There are several potential fees that can hit you when investing:

Different kinds of investments have different fees and it was a lot to navigate at first, so here’s an overview of three key fees: management, advisory, and trading. We did the research so you don’t have to!

Management Fees

Mutual funds and ETFs all have management fees also known as expense ratios. These are fees charged by the fund managers for deciding how to build the portfolio and overseeing it regularly.

I decided to invest in a mix of actively managed mutual fund and passively managed ETFs. Why? There’s some types of investments where active management makes sense - these are generally less popular investments where, if you’re a pro, you have the potential to do much better than just investing in a passive ETF. 

A good example of this is Indian stocks. The average actively-managed Indian stock fund has outperformed the broad Indian stock market by more than 3% over the past ten years. That difference is important!

Active mutual funds cost more, because they’re more work to run and usually have a team of full-time professional investors managing them. Management fees on active mutual funds range from 0.5% to 1%. So If you have $10,000 invested in a fund that charges 0.5%, that will cost you $50 each year. This can add up, but if you think the fund can give you some solid returns, it’s worth it. 

To balance the slightly higher fees of some of the active mutual funds, I also invested in some passive ETFs that mirrored a few stock indexes. I invested in passive ETFs where historically it’s been difficult for active portfolio managers to beat the stock market’s return, the S&P500 (the key U.S. stock market) in particular. Fees for passive ETFs are super low, typically around 0.03% - 0.15%. 

Blending active and passive investments kept my management fees low and potential for good returns high. 

Advisory fees

Next, I thought about whether I wanted to work with a financial advisor, but ultimately decided against it. The fees of investment advisors I spoke with were going to be between 0.75% and 1.25% of my total portfolio. I weighed this (pretty high!) fee against the potential benefit and didn’t think it was worth it. 

I don’t have a ton of money, so a financial advisor wouldn’t have wanted to spend much time looking after my investments. I would have paid them over 1% of my total portfolio value each year, in exchange for maybe a few hours of their work. Not a good trade in my opinion.

I also looked at using a robo advisor, but the funds they offered were super limited and they didn’t provide any customization for my goals, so I decided against that too. Advisory fees on robo platform are lower than with human advisors, but can still be 0.3% to 1% per year. For a generic and limited product, this didn’t seem worth it either.

Trading Commissions

Lastly, let’s talk about trading commissions, also known as brokerage fees. Every time I buy or sell stocks, my brokerage charges a fee per trade. These trading commissions can vary a lot between brokers. Some brokers offer commission-free trades, while others might charge a flat fee per trade.

For instance, I use a brokerage that charges $5 per trade. If I trade frequently, these costs can add up quickly. Let’s say I make 20 trades a year; that’s $100 in trading commissions. To minimize these costs, I trade less frequently and focus on long-term investments, not day-trading.

Takeaways

Here are some things to think about when managing your investment fees:

Management Fees: Look at the expense ratios of funds. Consider blending passive and active strategies to lower the total fees while maintaining the potential for solid long-term returns

Advisory Fees: Consider the value of professional advice versus the cost. Robo-advisors can be a cost-effective alternative, but the investments are usually pretty limited.

Trading Commissions: Be mindful of how often you trade and the fees charged by your brokerage. Consider brokers with commission-free trades if you trade frequently.

In the end, understanding these fees helped me make build my investment portfolio while ensuring I wasn’t paying too much. I hope this helps you navigate your investment journey!